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Clarion Group warns Food Service Operators in the Corporate and School/College Markets are Facing a Dilemma

November 12, 2012 - Food service operators in the corporate and school/college markets are facing a dilemma, says Tom Mac Dermott, president of Clarion Group, a dining and hospitality consulting firm.

“After absorbing a year’s worth of rising wholesale prices, the food service operator can expect that food costs will still keep going up well into 2013. The dilemma is how to recoup the higher costs in the face of customer resistance.”

“While the recession is slowly receding, many people, including college students, are more cost-conscious and haven’t forgotten the lessons of thrift they learned in 2009-10,” Mac Dermott says. “The company and campus food service operator also faces the fact that its customer now has more alternatives for meals.”

The source of the problem can be seen in the indexes reported by the federal Bureau of Labor Statistics (BLS), according to Mac Dermott. “Food service operators can’t be guided by the popular consumer price index,” he says. “That only tells you what’s happening now and in the past.”

The important indexes, he says, are for “intermediate goods” – foods in the course of being processed for distribution – and “crude goods” – the raw materials. Changes in these prices affect the prices the distributor will charge the food service operator in the next month or two and probably, for four to six months in the future as raw foods move from the farm up through the processing and distribution chain.

“For unprocessed, perishable products, like fresh fruits and vegetables, fresh fish and fresh milk, the crude-stage price changes, up or down, are felt almost immediately, as these products are sold within a week of being harvested,” Mac Dermott noted. “Meat, as it moves from the farm to the slaughter house and upwards has a longer lead time. For processed products like frozen or canned food, the cycle is still longer.”

How big are the prospective price increases that will affect the food cost? The BLS reported that intermediate foods prices increased 2% in September, the seventh consecutive increase in this index. The crude food prices index has increased by 11.8% from June through September, on top of a 7% increase in the preceding three months.

A major component of the increase, the BLS reports, was in animal feed. “The farmers will pass along that cost to the slaughterhouse, which will pass it along up the chain, until it appears on the corporate and campus food service’s invoices,” Mac Dermott said.

Employees and students have alternatives to the on-site food service operation. The on-site food service operator is best advised to look first inside the operation before planning for price increases, according to Mac Dermott. “You’re likely to find many ways to reduce waste and improve efficiency and bring your costs down, before asking the customer to bear the burden.”

Some places Mac Dermott suggests looking:

• The distributors: Can a change in delivery schedules or faster payment of his invoices help the distributor lower your prices?
• The chef: How good is he or she in planning, ordering and utilizing foods? Is the food production staff skilled and efficient? Waste can cost more than price increases. It’s not hard to spot and fix.
• The servers: Are the meals being served more generous than the portions provided in your price-and-portion guide? A server ladling out 10 oz. where the guide says 6 oz. is undoing all the efficiencies you have instituted in the production process and costing the food service operation far more than even 10% or 15% wholesale price increases.
• The menu: Are you featuring too many high-cost items, especially slow sellers? The leftovers, no matter how carefully preserved and repackaged into new products, will never bring the same margin as when they were first presented.

“When you have to increase prices,” Mac Dermott advises, “remember the words from the song, ‘a spoonful of sugar makes the medicine go down in a most delightful way.’ Introduce new items at profitable price point, change portions and above all, market, merchandise and promote.”

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About Clarion Group
Clarion Group is an consulting firm that advises companies, professional firms, colleges and universities, independent schools and institutions in the management, operation and improvement of their in-house employee/student food services, catering, conference, lodging and related hospitality services throughout the U.S. and Canada.